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As Bob Carr arrived at Government House this week for his last
few minutes as premier, he remarked how wonderful it was to live in
a democracy where a government could change so peaceably.

An hour or so later the new Premier, Morris Iemma, was standing
under a grand old fig tree on the sweeping harbourfront lawns,
outlining his new cabinet.

"This fresh new cabinet is ready to serve the people of NSW,"
Iemma said. "Our priority is to improve the delivery of basic
services, and plan and work on major projects for your future."

Hang on a minute. There's not been an election. This isn't a
change of government at all. This is the same ALP Government,
albeit with a different leader and a few new faces.

Pretending we've had a change of government and distancing
himself from the Carr years are central to Iemma's political
survival strategy. His re-election depends on convincing voters in
key seats in Sydney's commuter belt, and in regional towns like
Tweed Heads, Maitland and Queanbeyan, that he and his Government
should not be punished for the problems of the past 10 years.

That means creating a break with the past. Carr may be a great
Labor hero this week, but don't expect his colleagues to fete him
for much longer. The unpopular vendor tax was the first to go now
that its proponents, Carr and Michael Egan, are out of public
life.

Iemma has junked the old justification for the tax - that
wealthy investors must pay for a tax break to help first home
buyers. The Government now agrees with the Property Council: the
tax is bad because it's a drag on NSW's competitiveness.

The second step will be to create the perception that the Iemma
Government has the smarts to deal with the challenges it faces. The
challenges that remain, however, are far more intractable than a
tax which can be gone with the flourish of a pen.

The biggest of these, identified by Iemma as his "highest
priority", is getting the Sydney rail network functioning
properly.

Although only 13 per cent of Sydneysiders catch the train to
work, a large proportion live in western Sydney seats, and John
Howard has been highly successful over the past decade in turning
them into Liberal voters. The margins might be large but the
electorate has proved increasingly volatile.

Iemma's problem is that change in the rail system will be
painfully slow. The new timetable, which comes in next month, will
hopefully improve reliability of services and stem the headlines
about chronically late trains. But the timetable involves running
fewer trains outside peak hour and allowing longer travel times so
drivers have a better chance of meeting the timetable. It will make
a marginal improvement and if it doesn't work - and new timetables
are notoriously difficult to implement - the Government can expect
an almighty kicking.

Spending $1 billion upgrading the rail network is also a
double-edged sword. Untangling the lines so that breakdowns don't
jam the system will help in the long term, but there could be
delays as the track work is done.

That's why Iemma began talking this week about a "new" part of
the plan: "culture change" on the railways. This, he explained, is
about getting the staff and management to start thinking about
customers first. Whether this is code for taking on the unions to
change work practices or a lesser task of implementing a different
management culture to make staff more customer-friendly remains to
be seen.

On his second-biggest challenge - economic management - Iemma
confronts a collision of political necessity and economic
reality.

With an election 18 months away, the new Premier-Treasurer needs
a war chest. As well as the expensive infrastructure commitments
announced by Carr, Iemma has vowed to "make progress" in three
expensive social policy areas: affordable housing, mental health
and disability services.

"The question is what tangible actions will he put on the
table," says the NSW Council of Social Service director, Gary
Moore.

This policy agenda will cost money - something Iemma doesn't
have. The new Finance Minister, Michael Costa, used his first day
in the job on Wednesday to underscore the state's parlous budget
position.

Just a month into the 2005-06 financial year, Costa admitted the
slender $303 million surplus forecast in May has been wiped out and
the budget had lapsed into the red even before Tuesday's
announcement that the vendor duty, worth almost $358 million, would
be going.

Iemma refuses to say how deep the deficit is, although some
budget specialists say privately it could be at least $500 million.
By making Costa finance minister, Iemma has put the spotlight on
government expenditure. Costa's first job is to co-ordinate an
audit of the state's expenditure and assets to identify
savings.

"I don't want people to think we are in a crisis situation;
we're not," Costa said soon after being sworn in. "We're in a very
healthy position because we've got a very healthy balance sheet.
But we can't keep going the way we are."

He said that "structural adjustment" was required to stop the
rot.

An expenditure review committee set up by the outgoing
treasurer, Andrew Refshauge, had already identified $300 million in
savings, but Costa says much more is needed.

The Access Economics director Chris Richardson says since the
Sydney property market went off the boil it was only a matter of
time before the state coffers would require an overhaul.

"All state governments have been happy to take the easy ride
through the period of the housing price up

swing," he says. "Sydney in particular has to change its ways.
You can't simply keep relying on the housing market to bail out
your caving in to special interest groups on spending - something
needed to happen."

Iemma has already quarantined public servants - such as
teachers, nurses and police - from cuts but Richardson believes
staffing levels of core services need to be examined. He also warns
that the ageing population means the Government will eventually
have to look at raising some taxes.

There are other irritants. Iemma inherits a long-running stoush
with the Federal Government over the carve-up of the GST between
the states. The federal Treasurer, Peter Costello, has demanded NSW
join all states except Western Australia in scrapping several
business-related stamp duties because of a windfall from the
GST.

The NSW Government says this is unreasonable because $3 billion
of the $13 billion GST collected in NSW flows to other states,
including the boom states of Queensland and Western Australia.
Iemma called for a fairer share the day he was sworn in.

But Costello shows no sign of changing the GST distribution and
has promised a "response" to those states refusing to cut stamp
duties. This could mean NSW ends up with even less revenue from the
Commonwealth.

The axing of the vendor duty illustrates how difficult it is for
a state government to introduce a new tax. That leaves Iemma little
choice but to look for savings, and there are never any easy
options when deep budget cuts are required.

Ironically, the state's economic slowdown may assist in
addressing one challenge identified by Iemma - making housing more
affordable for home buyers. But his first decision, to scrap the
vendor tax, is counterproductive, says Moore. "We'd like to see
state taxes used strategically to get more private sector
investment in lower-cost housing," he says.

Recently the shortage of funds has meant public housing has
become restricted to welfare recipients. Providing land releases
has been one of the Labor Government's biggest failings, leaving
new home buyers facing rising prices for land. But land releases
require spending money on infrastructure.

Then there are the more immediate planning challenges: ensuring
Sydney has enough water and electricity and completing the
metropolitan strategy.

The announcement of a desalination plant at Kurnell has turned
surprisingly sour for the Government. Sydneysiders want the water
problem fixed but seem disturbed by the idea that the Government
has opted for an energy-intensive technology used mainly in desert
climates, rather than recycling.

The forthcoming decision on Sydney's energy needs is likely to
be even more politically explosive. A decision to proceed with new
generation options that do not explicitly ban coal will send the
environmental movement spare. Without Carr's passion for green
issues, keeping the preferences of Green voters will be a
challenge.

In two inner-city Labor seats the Greens are the main rival; in
others they snare a fair swag of Labor first preferences.

The challenges in the difficult health portfolio stretch way
beyond those issues most likely to throw the Opposition into a
frenzy of criticism - surgery waiting lists and hospital beds.

They are the sleeper issues of workforce shortages, particularly
in mental health, as well as the increasing impact of an ageing
population on overstretched services.

Doctors and nurses working in mental health describe an
incredible turnover of staff, as psychiatrists in the public system
leave for the better-paid private hospitals and nurses burn out
from the workload.

The director of the Australian Health Policy Institute at the
University of Sydney, Professor Stephen Leeder, said mental health
services were "radically under-resourced".

"Police are filling the gap for a lot of acute psychiatric
services and prisons are well known to be repositories for people
with mental illness who should be treated elsewhere," he said.
"This is a major problem for resources - it doesn't save us money
because once you begin using law and order and prisons to deal with
this it becomes very, very expensive."

The Government also needed to focus on the overlap between
mental health and drugs and alcohol. Iemma's decision to combine
the portfolios of health and drugs and alcohol for the new Health
Minister, John Hatzistergos, was a step in the right direction,
Professor Leeder said.

With surgery waiting lists still hovering around the 60,000
mark, and with 5076 people waiting longer than 12 months for
operations, Iemma will have to ensure the $115 million investment
to reduce waiting times that he made as health minister over the
past year continues to get results.

Finally there is the challenge Iemma has not identified:
ensuring good corporate governance within his administration. Bob
Carr's government will be remembered for obsessive control over
information and its take-no-prisoners approach to dealing with
scandals.

It's time for Iemma to get serious about guidelines and codes of
practice for his ministers and to introduce more up-to-date
reporting on policy outcomes through the introduction of reporting
that weighs not just the economic impact but also the social and
environmental outcomes.